The ongoing trade skirmish between the US and China is showing no signs of abating with the US increasing tariffs from 10% to 25% on $200 billion worth of Chinese products on 10 May 2019. China in retaliation has said that it will raise tariffs on $60 billion worth US imports beginning 1 June 2019. China has already imposed tariffs on US products worth $110 billion last year. The worsening economic indicators in the US, like student loan delinquency and yield curve inversion, may pose challenges for the incumbent Indian government as well, says a research note.
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI), says, "Not just China, the US is waging tariff war with other countries, with tariffs imposed on its major trade partners Canada, Mexico and others as US is convinced that it has to reduce its burgeoning trade deficit.
Interestingly, we find that the impact of such tariffs may be hurting US more and hence that country may be caught in a vicious cycle of imposing more tariffs as a veiled threat of not retaliating."
US President Trump has created a lot of noise on the trade front, since he joined office, with the language of the various trade related documents making it amply clear that US has felt itself to be handed the short end of the stick by its trade partners. It began with the 2017 US Trade Policy Agenda outlining the new administration’s four trade priorities: promoting US sovereignty, enforcing US trade laws, leveraging American economic strength to expand their goods and services exports, and protecting US intellectual property rights.
Since then the US has renegotiated the North American Free Trade Agreement (NAFTA) with Canada and Mexico and the US Korea (KORUS) free trade agreement. It has imposed tariffs on imported steel and aluminium, which have invoked retaliation from its trade partners.
"With all the hullabaloo created over President Trump’s trade measures, we looked at US’ trade deficit and found that its goods trade deficit has in fact increased in 2018, with imports growing more than exports. A strengthening US economy and strong dollar have supported the imports, despite the hue and cry raised by President Trump on the trade deficit," Dr Ghosh from SBI added.
On an annual basis, in the end use commodity category, foods, feeds, beverages exports has seen the slowest growth. More than 800 food and agricultural products from the US have been subject to retaliatory tariffs from China, the EU, Turkey, Canada, and Mexico. This could be reason for the slowing exports growth of agricultural products. With nearly 20% of farm income derived from exports, the trade war will impact the US farmers to a considerable extent, SBI says.
For example, Dr Ghosh says, Chinese data shows that the monthly growth of imports from US has declined more as compared to Chinese exports to US after July 2018. Although, China will be impacted more as the base of its exports to US is much larger than its imports, it appears that US is not going to remain unscathed, he added.
The report also points out the large difference between the official trade statistics released by the US and People’s Republic of China. However, as the latest data is available in the Chinese General Administration of Customs, SBI found that in absolute terms Chinese exports to the US have gone down to $31.4 billion in April 2019 from $36.1 billion in April 2018. Meanwhile Chinese imports from US have declined to $10.3 billion in April this year from $13.9 billion in same period a year ago.
In addition, SBI says, there are even concerns about the tariff wars spilling over to the financial markets in the form of China cutting short its exposure in US treasury market. China owns $1.13 trillion in treasury, a fraction of the total $22 trillion in US debt outstanding but 17.7% of the various securities held by foreign governments, according to data from the treasury and the Securities Industry and Financial Markets Association.
With 25% tariffs on $250 billion worth of Chinese goods, the US can generate revenue to the tune of $62.5 billion annually. "Will this be sufficient to compensate for the loss incurred by the American consumers and exporters and more importantly the harm caused to the China-US relations? A recent survey by Pew Research Centre has found that American public is more positive about free trade agreements and sceptical about tariffs. With the upcoming elections, it would not be amiss for the US President to take into account sound economic principles and people’s mandate," Dr Ghosh from SBI concludes.